RBI Guidelines: Statutory Auditor Appointment for Co-op Banks

Comprehensive Guide: RBI Guidelines on Appointment/Re-appointment of Statutory Auditors for Co-operative Banks

In a move to enhance transparency and accountability in the financial sector, the Reserve Bank of India (RBI) has issued comprehensive guidelines on the appointment, re-appointment, and removal of Statutory Auditors (SAs) for State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Effective from April 1, 2024, these guidelines aim to strengthen the auditing process and uphold the integrity of financial institutions.

1. Purpose and Applicability

The guidelines, rooted in the Banking Regulation (Amendment) Act, 2020, necessitate StCBs and CCBs to seek prior approval from the RBI for SA-related decisions. Applicable from April 1, 2024, these guidelines cover the appointment, re-appointment, and removal of SAs, emphasizing the importance of compliance with Section 30(1A) of the Banking Regulation Act, 1949.

2. Prior Approval Process

To streamline the appointment process, NABARD will annually compile a list of eligible audit firms for StCBs and CCBs, ensuring compliance with defined eligibility criteria. Banks will then select audit firms from this list, obtain necessary approvals, and submit applications to the RBI before July 31 of the reference financial year.

3. Eligibility Criteria for SAs

The eligibility criteria outlined in Appendix I detail the requirements for audit firms based on the asset size of the banks. The guidelines emphasize the exclusive association of partners with the firm, specific qualifications, and minimum years of audit experience. Compliance with ethical standards, absence of debarment, and proficiency in Computer Assisted Audit Tools and Techniques (CAATTs) are also highlighted.

4. Independence of Auditors

The guidelines underscore the importance of monitoring auditors’ independence and avoiding conflicts of interest. Stringent restrictions on concurrent audit assignments and time gaps between non-audit services aim to maintain the integrity of the audit process.

5. Review of Performance and Tenure

An annual review of the SA’s performance is mandated, ensuring prompt reporting of any lapses or negligence. The guidelines prescribe a one-year tenure for SAs, with reappointment subject to continued eligibility. A six-year cooling-off period prevents immediate reappointment after completion of a full or part tenure.

6. Limitations on Audit Firm Engagements

The guidelines set a limit of auditing a maximum of five banks concurrently, with additional restrictions on the simultaneous audit of StCBs and CCBs in the same state. These limitations are designed to ensure audit firms’ focus and prevent potential conflicts of interest.

7. Audit Fees and Expenses

Audit fees are to be decided based on statutory/regulatory provisions and board recommendations, ensuring a reasonable and commensurate compensation structure. This emphasizes fair remuneration considering factors like the scope of audit, complexity, and identified risks.

8. Statutory Audit Policy and Mechanism for SAs

Banks are required to formulate a Board-approved policy on SA appointments, providing transparency and objectivity. The guidelines also stress the importance of audit firms having proficiency in the local language and a thorough understanding of RBI regulations.

Conclusion

In conclusion, the RBI’s guidelines on the appointment and re-appointment of SAs for Co-operative Banks mark a significant step toward fortifying the audit process within the financial sector. The focus on eligibility criteria, independence, and a structured approval process aims to enhance the credibility and reliability of financial institutions, aligning with broader efforts to ensure transparency and accountability in the banking industry.

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Reserve Bank of India

RBI/2023-24/113
Ref.No.DOS.ARG/SEC.8/08.91.001/2023-24

January 15, 2024

The Chairman / Managing Director / Chief Executive Officer,
All State Co-operative Banks (StCBs)
All Central Co-operative Banks (CCBs)

Madam / Dear Sir,

Guidelines on Appointment / Re-appointment of Statutory Auditors of State Co-operative Banks and Central Co-operative Banks

The Banking Regulation (Amendment) Act, 2020 (No. 39 of 2020), notified in the Gazette of India on September 29, 2020 (vide Notification No. 64 of that date), has come into force with effect from April 01, 2021 (Gazette Notification No. 4113 dated December 23, 2020), for Rural Co-operative Banks i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs).

2. Accordingly, Reserve Bank of India (RBI), in exercise of its powers conferred under Section 30(1A) of the Banking Regulation Act, 1949, has framed the guidelines enclosed as Annex of the Circular which shall be applicable to StCBs and CCBs for seeking prior approval of RBI for appointment, re-appointment or removal of Statutory Auditor (SA), and other related matters.

3. These guidelines shall come into effect from April 1, 2024. Accordingly, for all accounting periods commencing on or after April 1, 2024, all StCBs and CCBs shall submit application for prior approval of RBI before July 31 of the reference accounting year, in accordance with the guidelines.

Yours faithfully,

(Rajnish Kumar)
Chief General Manager

Encl.: Annex

Annex

Guidelines on Appointment / Re-appointment of Statutory Auditors of State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs)

1. Purpose

1.1 State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs) are required to obtain prior approval of Reserve Bank of India (RBI) for appointment, re-appointment or removal of Statutory Auditor (SA) as per the provisions of Section 30(1A) of the Banking Regulation Act, 1949 (BR Act), with effect from 1st April 2021, i.e., the date on which Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020) came into effect. Accordingly, the following guidelines are being issued by the Reserve Bank of India (‘RBI’), in exercise of its powers under the BR Act, to StCBs and CCBs, on appointment, re-appointment or removal of Statutory Auditors (SAs) and other related matters.

1.2 Definitions

i) “State co-operative bank” shall be as defined under sub-section (u) of Section 2 of National Bank for Agriculture and Rural Development Act, 1981.

ii) “Central co-operative bank” shall be as defined under sub-section (d) of Section 2 of National Bank for Agriculture and Rural Development Act, 1981.

iii) “NABARD” means “National Bank” established under Section 3 of National Bank for Agriculture and Rural Development Act, 1981.

2. Applicability

These guidelines shall be applicable to StCBs and CCBs (hereinafter referred to as the ‘bank’) with effect from April 1, 2024.

3. Prior Approval of RBI for Appointment / Re-appointment of Statutory Auditors (SAs)

3.1 The bank shall obtain prior approval of RBI before appointment, re-appointment or removal of SA.

3.2 The bank shall seek prior approval for re-appointment of SA annually.

3.3 Procedure

i. NABARD shall obtain a list of audit firms [Partnership firms / Limited Liability Partnerships (LLPs)], on an annual basis, from the Institute of Chartered Accountants of India (ICAI).

ii. Thereafter, NABARD shall apply the eligibility criteria prescribed for SAs in this circular and prepare an All-India State-wise list of eligible audit firms.

iii. NABARD shall then share this list with the banks for selection and appointment / re-appointment of SAs.

iv. The bank shall select the audit firm(s) from this list, obtain the necessary approvals from the Board of Directors (Board) / Audit Committee of the Board (ACB), and submit application for prior approval to Department of Supervision, RBI, before July 31 of the reference financial year.

4. Eligibility Criteria of Statutory Auditors (SAs)

In case of appointment of fresh SA, the bank shall select from the list provided by NABARD the audit firms fulfilling the requirements under these guidelines as enumerated in Appendix I and forward the name(s) of the shortlisted audit firms to RBI as per the procedure prescribed in Appendix II.

5. Independence of Auditors

5.1 Board / ACB of the bank shall monitor and assess the independence of auditors and conflict of interest, if any, in terms of the relevant statutory / regulatory provisions, Standards and best practices. Concerns, if any, raised by the Board / ACB shall be reported to NABARD.

5.2 Concurrent auditors of the bank shall not be considered for appointment as SA of the same bank. There shall be a minimum gap of one year between completion of one assignment and commencement of the other assignment.

5.3 The time gap between any non-audit work (services mentioned in Section 144 of the Companies Act, 2013, internal assignments, special assignments, etc.) undertaken by the SA for the appointing bank shall be at least one year, both before appointment and after completion of tenure as SA. However, during the tenure as SA, based on the decision of the Board / ACB, an audit firm may provide such services to the appointing bank which may not normally result in conflict of interest. Special assignments, including those such as (i) Tax audit, tax representation and advice on taxation matters, (ii) Audit of interim financial statements, (iii) Issuance of certificates that are required to be made by the SA in compliance with statutory or regulatory requirements, and (iv) Reporting on financial information or segments thereof, may not be treated as conflict of interest.

5.4 The restrictions, as detailed in paras 5.2 and 5.3 above, shall also apply to an audit firm under the same network of audit firms or any other audit firm having common partner(s), as defined in Rule 6(3) of the Companies (Audit & Auditors) Rules, 2014.

5.5 The SA shall report concern(s), if any, regarding the conduct of Management such as non-availability of information / non-cooperation by the Management (which may hamper the audit process), etc., to the Board / ACB and also to NABARD.

6. Review of Performance of Statutory Auditors (SAs)

6.1 The Board / ACB of the bank shall review the performance of SA annually. Any serious lapse / negligence in discharging audit responsibilities, conduct issues on the part of the SA, or any other matter considered as relevant, shall be reported with the approval of the Board / ACB to NABARD within two months from the completion of the audit.

6.2 Violation of extant statutory / regulatory norms and lapses in carrying out audit assignments such as misstatement of financial statements, etc., by the SAs would be dealt suitably under the relevant statutory / regulatory / supervisory framework.

7. Tenure and Rotation of Statutory Auditors (SAs)

7.1 SAs shall be appointed at a time for a period of one year only and shall be reappointed annually for the succeeding two years subject to them continuing to satisfy eligibility norms stated in these guidelines. During such period, premature removal of the SA shall require prior approval of RBI. However, any such request for removal shall be forwarded to RBI with the approval of the Board / ACB.

7.2 An auditor / audit firm shall not be eligible for appointment / re-appointment in the same bank for six years (two tenures) immediately after completion of a full or part tenure. In case an auditor / audit firm has conducted audit of the bank for part-tenure (one year or two years) and then is not re-appointed for the remainder tenure, it shall not be eligible for re-appointment in the same bank for six years after completion of part-tenure. However, audit firms can continue to undertake statutory audit of other banks.

8. Number of StCBs / CCBs an Audit firm can Audit

8.1 An audit firm can concurrently take up statutory audit of a maximum of five banks (including not more than one StCB) in a year.

8.2 The limit of five banks will be in addition to the limit of 20 Regulated Entities (REs), as prescribed in the ‘Guidelines for Appointment of Statutory Central Auditors (SCAs) / Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)’ dated April 27, 2021.

8.3 Further, in a year, an audit firm cannot simultaneously take up statutory audit of both StCB and CCBs operating in the same State.

8.4 In other words, an audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NaBFID, NHB, EXIM Bank) or RBI], eight Urban Co-operative Banks (UCBs), eight Non-Banking Financial Companies (NBFCs), and five StCBs / CCBs (including not more than one StCB) in a year.

8.5 This limit is subject to the audit firm’s compliance with the eligibility criteria and other conditions as prescribed in these guidelines and within the overall ceiling prescribed by any other statute or rules.

8.6 For the purpose of these guidelines, a group of audit firms having common partner(s) and / or under the same network shall be considered as one unit and considered for appointment as SA accordingly. The incoming audit firm shall not be eligible if such an audit firm is associated with the outgoing audit firm or is under the same network of audit firms.

8.7 Shared / Sub-contracted audit by any other audit firm or by an associate audit firm under the same network of audit firms, is not permitted.

9. Audit Fees and Expenses of Statutory Auditors (SAs)

9.1 The audit fees for SAs of all the banks shall be decided in terms of the relevant statutory / regulatory provisions and the Board / ACB of banks shall make recommendation to the competent authority as per the relevant statutory / regulatory instructions for fixing audit fees of SAs.

9.2 The audit fees for SAs of banks shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc.

10. Statutory Audit Policy, Appointment Procedure, Working knowledge of the language of the state and Familiarisation Mechanism for Statutory Auditors (SAs)

10.1 The bank shall frame a Board-approved policy on appointment of SA and host it on its official website / public domain. The bank shall also formulate necessary procedures thereunder for selection / appointment / re-appointment / removal of SA. Apart from conforming to all the relevant statutory / regulatory requirements, the policy shall accord necessary transparency and objectivity on all the major aspects of this important assurance function.

10.2 To decide the branch / business coverage under the Statutory Audit, the bank shall be guided by the guidelines given in Appendix III of the circular.

10.3 For smooth conduct of the statutory audit, it is preferable that the audit firm to be appointed as SA has proficiency in the local language of the state / UT where the auditee bank is located.

10.4 Before commencement of the audit, the bank shall sensitize its SAs, on aspects such as relevant RBI Regulations, systems and procedures at the bank, expectations and requirements from the SAs, etc.

Appendix I

Eligibility Criteria for Appointment as SA – Basic Eligibility for StCBs / CCBs

A. Notes

Note 1: There should be at least one-year of continuous association of partner(s) with the firm as on the date of shortlisting (by banks) for considering them as FTPs.

For all banks with asset size above Rs. 1,000 crore, the FTP’s association with the firm would mean exclusive association. The definition of ‘exclusive association’ will be based on the following criteria:

a. The FTP should not be a partner(s) in other firm/s.

b. She / He shall not be employed full time/part time elsewhere.

c. She / He shall not practice in her / his own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice under Section 2(2) of the Chartered Accountants Act, 1949.

d. The Board / ACB shall examine and ensure that the income of the partner(s) from the firm / LLP is adequate for considering him / her as full-time exclusively associated partner(s).

Note 2: CISA / ISA / DISA Qualification:

There shall be at least one-year continuous association of Paid CAs (with CISA / ISA / DISA qualification) with the firm, as on the date of shortlisting, to consider them as Paid CAs with CISA / ISA / DISA qualification for the purpose.

Note 3: Audit Experience:

Audit experience shall mean experience of the audit firm as Statutory Central / Branch Auditor of Commercial Banks / UCBs / NBFCs (including HFCs) / AIFIs / Statutory Auditor of StCBs / CCBs / RRBs. In case of merger and demerger of audit firms, merger effect will be given two years after merger, while demerger will be given effect immediately.

Note 4: Professional Staff:

Professional staff includes audit and article clerks with knowledge of book-keeping and accountancy and who are engaged in on-site audits but excludes typists / stenos / computer operators / secretaries / subordinate staff, etc. There shall be at least one year of continuous association of professional staff with the firm, as on the date of shortlisting, for considering them as professional staff.

B. Additional Consideration

(i) The audit firm, proposed to be appointed as SA, should be duly qualified for appointment as auditor of a company in terms of Section 141 of the Companies Act, 2013.

(ii) The audit firm should not be under debarment by any Government Agency, National Financial Reporting Authority (NFRA), the Institute of Chartered Accountants of India (ICAI), RBI or Other Financial Regulators.

(iii) The bank shall ensure that appointment of SA is in accordance with the ICAI’s Code of Ethics / any other such Standards adopted and does not give rise to any conflict of interest.

(iv) If any partner(s) of a Chartered Accountant firm is a director in any bank, the said firm shall not be appointed as SA of that particular bank.

(v) The auditors should have capability and experience in deploying Computer Assisted Audit Tools and Techniques (CAATTs) and Generalized Audit Software (GAS), commensurate with the degree / complexity of computerisation of the banks.

C. Continued Compliance with basic eligibility criteria

In case an audit firm (after appointment) does not comply with any of the eligibility norms (on account of resignation, death, etc., of any of the partner(s) / employee(s), action by Government Agencies / NFRA / ICAI / RBI / other Financial Regulators, etc.) as stated in B (ii) above, it shall promptly approach the bank with full details. Further, such audit firm shall take all necessary steps to become eligible within a reasonable time and, in any case, the audit firm should be in compliance with the above norms before commencement of Annual Statutory Audit for Financial Year ending 31st March and till the completion of annual audit.

In case of any extraordinary circumstance after the commencement of audit, such as death of one or more partner(s) / employee(s), etc., which may render the firm ineligible with respect to one or more of the eligibility norms, RBI will have the discretion to allow the concerned audit firm to complete the audit, as a special case.

Appendix II

Procedure for Appointment of SA

1. The process of appointment of SA in StCB / CCB starts with the bank sending the application to RBI with the names of the audit firm as approved by its Board / ACB, followed by grant of prior approval by RBI and concludes with the appointment of SA in the AGM of the concerned bank.

2. In case of fresh appointment of SA, for each vacancy of SA, the bank shall shortlist minimum of two audit firms from the panel of NABARD.

3. The bank shall place the names of shortlisted audit firms, in order of preference, before their Board / ACB for ‘in principle’ approval. After approval of the Board / ACB, the bank shall approach RBI for prior approval.

4. The banks having their Registered Office within Mumbai Region shall submit their application to the Audit Relation Group (ARG), Department of Supervision (DoS), Central Office (CO), RBI, Mumbai. Banks under the jurisdiction of Nagpur Office of RBI shall submit their application to DoS, RBI, Nagpur. The banks in other States / UTs shall submit their application to DoS of the respective Regional Office of RBI in the state where the Registered Office of the bank is located.

5. The bank shall obtain a certificate, as per Form B, from the shortlisted audit firms to the effect that the audit firm complies with all the eligibility norms prescribed by RBI for the purpose. Such certificate on the letter-head of the audit firm should be signed by the managing partner of the audit firm, under the seal of the said audit firm.

6. While recommending the name(s) of audit firm(s), the bank shall also furnish a certificate, in the format as per Form C, stating that the audit firm proposed to be appointed as SA by it comply with all the eligibility norms prescribed by RBI.

7. While approaching RBI for prior approval, the bank shall indicate its total asset size as on March 31st of the previous financial year (audited figures), attach a copy of Board / ACB Resolution recommending name(s) of audit firm(s) in the order of preference, Form B and Form C along with all the documents mentioned therein, to facilitate expeditious processing.

Appendix III

Guidelines for selection of branches for audit by SAs

Norms to be followed while making selection of branches for audit are as under:

1. The branches selected for audit should cover at least 70% of the total advances outstanding.

2. Top 20 branches / Top 20% of the branches of the banks (in case of banks having less than 100 branches) to be selected in order of level of outstanding advances should be compulsorily included for audit.

3. Branches where fraud, embezzlements or transactions of a suspicious nature are suspected or have taken place may be taken up for audit, if not covered with reference to (2) above.

4. Branches where the loan, business growth is 50% and more over the preceding year should also be compulsorily taken for audit, if not covered with reference to criteria (2) and (3) above.

5. The actual selection of branches to be taken up for audit should be decided by the Board / ACB keeping in view the above guidelines.

6. While deciding the branches and business coverage, the bank shall interalia consider bank-specific characteristics such as degree of centralisation of processes, need to address fraud risk and credit risk, adverse report from internal / concurrent auditors, whistle blower complaints, and unusual patterns / activity shown by internal MIS reports.

7. The bank shall also disclose on its website / public domain the extent of branch / business coverage under Statutory Audit for the respective year and the previous year.